Wednesday, July 2, 2014

Lyman Johnson - Hobby Lobby, a Landmark Corporate Law Decision

Earlier this week I asked Professor Lyman Johnson if he would care to share his thoughts on the Hobby Lobby case with us because I had so enjoyed his thoughtful posts on the Conglomerate before the decision was issued (see here and here).  Professor Johnson's contribution is below.

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             I thank the good folks here at the Business Law Prof Blog for inviting me to share some thoughts about the Supreme Court’s decision in the high-profile Hobby Lobby cases.  The Court held that a closely-held business corporation was a “person” under the Religious Freedom Restoration Act (RFRA), that such a for-profit corporation could indeed “exercise religion” under that Act, and that as applied to closely-held corporations the contraceptive mandate promulgated under the Affordable Care Act violated RFRA.  Two days after the controversial decision, the sky has not fallen, although dire forecasts to that effect still abound.  My post today makes a simple but basic point:  quite apart from the decision’s implications for religious liberty in the corporate realm - no small thing, to be sure - and notwithstanding the still unfolding legal and political fallout, Hobby Lobby immediately became a landmark decision in which the Supreme Court spoke in unprecedented fashion to an issue going to the very foundation of corporate law, the question of corporate purpose.

            Let’s begin with the notion of freedom, or liberty.  The Court ruled that RFRA protected the free exercise rights of close corporations and of those humans who own stock in and control those companies.  [Note:  human beings are routinely described in their “corporate” capacity in the majority opinion; the “corporation” is emphasized throughout]  In this way, the Court protected the “negative liberty” of those “corporate” persons, freeing them from the constraint of the federal contraceptive mandate.  But where exactly, from a legal vantage point, did the corporations’ “positive liberty” to “exercise religion” even come from?  Not from RFRA, which protects only against substantial governmental burdens on the exercise of religion.  Even though RFRA includes (via the Dictionary Act) a “corporation” within its definition of “person,” it does not itself affirmatively empower corporations.  The answer is that, as with all corporate attributes, this capacity to exercise religion is endowed by state corporate law. 

            The federal government did not - it could not - dispute the legal origins of corporateness as being rooted in state law.  And the U.S. failed to convince the Court that corporations as such cannot exercise religion because, let’s face it, our nation is full of churches and other religious bodies where religion quite obviously is being exercised in and through the corporate form.  But the Court also rejected the government’s attempted distinction of for-profit corporations from their non-profit counterparts because the Court rebuffed the government’s underlying view that “the purpose of such [for-profit] corporations is simply to make money,” stating that this position “flies in the face of modern corporate law.”  This is where the Hobby Lobby opinion pries open the very heart of corporate law. 

            Justice Alito, for the Court, rejected the view that business corporations must (and do) singularly act to make money, even as he acknowledged making profits to be “a” (not “the” or “sole”) objective and one that is “central.”  A few gems here:  “[M]odern corporate law does not require for-profit corporations to pursue profit at the expense of everything else and many do not do so.”  “[I]t is not at all uncommon for such corporations to further humanitarian and other altruistic objectives.”  “Not all corporations that decline to organize as nonprofits do so in order to maximize profits.  For example, organizations with religious and charitable aims might organize as for-profit corporations…”  Alito then notes that “the objectives that may properly be pursued by the companies in these cases are governed by the laws of the states in which they are incorporated…”  Given the breadth of objectives that can be pursued under state corporate law, it was easy for the Court to conclude that corporate liberty extended to “the pursuit of profit in conformity with the owners’ religious principles.”  This liberating principle was pointedly germane to the Hobby Lobby case itself, as Alito cited to the record wherein the owners of that corporation calculated they lose millions of dollars annually by closing on Sundays - precisely because of religious beliefs.  Doing so, that is, sacrificing profits, the Court ruled, is permitted and altogether proper under corporate law.  Too bad former Chancellor William Chandler did not have the benefit of Alito’s recent primer when Chandler wrote the deeply-flawed eBay v. Craigslist decision in 2010.

            To hold that close corporations were “free” from the contraceptive mandate of the Affordable Care Act, because of RFRA, the Court thus had to determine that, under state corporate law, such companies are likewise “free” from some imagined state legal mandate to maximize profits.  Readily concluding that corporations clearly do have the liberty not to maximize profits, the Court concluded that, as a legal matter, they were necessarily “free” to exercise religion.  But critically, that means business corporations, being free in this respect under state corporate law, can pursue a whole host of objectives other than making money.  Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.  As one who for decades has favored a vision of corporations (and corporate law) as being utterly conducive to serving broad social purposes - as freely determined, of course, by the appropriate corporate decisionmakers - and as one who supported Hobby Lobby, I found it odd to see these companies opposed by so many corporate progressives.  When one advocates for freedom on the corporate purpose front, just as is the case on the free speech front, one fights for those with whom one may disagree.  Remember here Voltaire and his “I do not agree with what you have to say, but I will defend to the death your right to say it.”  But take comfort:  although progressives lost the Hobby Lobby battle, they gained (accidently) an ironic victory on the all-important corporate purpose war.

            On the other hand, those in the corporate law academy who think corporate law mandates strict profit maximization now have a formidable judicial foe, and one that dwarfs the puny authority of Dodge v. Ford Motor Co. or eBay:  i.e., the U.S. Supreme Court.  Time to change the syllabus on corporate purpose…  To those on the right who favored Hobby Lobby (me) but who also favor the now-discredited position that corporate law requires profit maximizing (not me) take note:  you won the battle on religious freedom but to do so you had to suffer a major setback on corporate purpose.

            Finally, this case shows me that those who seek corporate reform may do so either from progressive impulses or from religious impulses, and from the left or the right of our political and theoretical spectrums.  The Hobby Lobby decision should, in that respect, ultimately be seen as a unifier for those in corporate law with reformist goals, not as a divider.

            My longtime colleague and collaborator, David Millon, and I, who typify these two quite different reformist impulses, respectively, will have much more to say on this vital subject in an article now in the works….

http://lawprofessors.typepad.com/business_law/2014/07/lyman-johnson-hobby-lobby-a-landmark-corporate-law-decision.html

Business Associations, Corporate Governance, Religion | Permalink

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